1. Can both reports of growth and decline be correct?
Yes, if they refer to different measures:
· Growth: In Real GDP (adjusted for inflation).
· Decline: In Nominal GDP (if inflation is negative—deflation—or if real growth is negative but nominal appears positive due to high inflation).
2. What gets measured in GDP?
The market value of all final goods and services produced within a country in a given period. Includes:
· Consumption (C)
· Investment (I)
· Government spending (G)
· Net exports (X-M)
Excludes intermediate goods, used goods, financial transactions, and non-market activities.
3. Difference between Nominal GDP, Real GDP, and Potential GDP
· Nominal GDP: Measured in current prices (not adjusted for inflation).
· Real GDP: Adjusted for inflation using constant base-year prices; measures actual output growth.
· Potential GDP: Estimated maximum sustainable output at full employment without inflation.
4. Always use the most recent completed calendar year as the base year?
No. Base years are updated periodically (e.g., every 5–10 years) to reflect changes in consumption/production patterns. Using a very old base year distorts comparisons; a recent, representative year is preferred.
5. Why do the three GDP calculation methods give the same result?
Because of the circular flow of income:
· Expenditure approach (C+I+G+NX) = Total spending on final goods.
· Income approach = Sum of all incomes (wages, rent, interest, profit) generated by production.
· Value-added approach = Sum of value added at each production stage.
All three measure the same economic activity from different angles, so they must equal total output.
6. Why is using Nominal GDP for growth assessment misguided?
Because Nominal GDP includes price changes (inflation or deflation), which can mask real output changes.
Example: If prices double and output stays the same, nominal GDP doubles but real GDP is unchanged—misleading about true economic growth.
Topic 5 :problems
1. Calculate Nominal GDP
Nominal GDP} = 10B + 0.5B + 0.02B + 8B + 0.02B + 0.06B = $18.6
2. Nominal GDP increased from $5,000B to $5,500B
No, you cannot conclude real production, income, or jobs increased.
The increase could be due entirely to inflation. Must examine Real GDP (adjusted for price changes) to assess real growth.
---
3. Why GDP overestimated if including both final and intermediate products
Because it would double-count value.
Example: Bread (final) includes flour (intermediate). Including both market values counts the flour twice. GDP only includes final goods/services to measure total value added.
4. Total sales = $10,000B, Intermediate products = $6,000B, find value added
5. GDP = $4,500B, C = $3,000B, G = $1,000B, NX = 0, find I
GDP = C + I + G + NX
4,500 = 3,000 + I + 1,000 + 0
I = 4,500 - 4,000 = $500 billion
---
6. Government expenditures = $1,400B, Government purchases in GDP = $815B
Difference because government purchases in GDP only include spending on newly produced goods and services (e.g., infrastructure, military equipment, salaries).
Excluded from GDP:
· Transfer payments (e.g., Social Security, unemployment benefits)
· Interest on debt
· Subsidies
These are expenditures but not purchases of current production.